Schnetzler, M.; Sennheiser, A.; Weidemann, M.: Supply Chain Strategies for Business Success.

Strategy/Planning/Design 1 Proceedings of the International IMS Forum 2004 "Global Challenges in Manufacturing", Cernobbio (Italy), 17-19 May 2004, pp. 691-698

Supply Chain Strategies for Business Success

Matthias Schnetzler1, Andreas Sennheiser1, Martin Weidemann2
1

Center for Enterprise Sciences (BWI), Swiss Federal Institute of Technology (ETH), 8092 Zrich, Switzerland, matthias.schnetzler@ethz.ch, andreas.sennheiser@ethz.ch
2

Research Institute for Rationalization and Operations Management (FIR), RWTH Aachen, Pontdriesch 14/16, 52062 Aachen, Germany, martin.weidemann@fir.rwth-aachen.de

Abstract This paper describes the application of the axiomatic design methodology to supply chain management in order to develop and implement comprehensive supply chain strategies. After an overview of supply chain management, strategy and issues, a supply chain design decomposition is presented. It separates objectives and means methodically regarding supply chain management. On this basis, supply chain strategies can be developed, which make top-level objectives systematically operational. Hence, supply chain strategies are aligned with business strategy ensuring that all measures contribute to value creation. Furthermore, the development and implementation of supply chain strategies is framed into a decision-making process. An example illustrates the application. Keywords Supply Chain Management, Supply Chain Strategy, Axiomatic Design Methodology

Introduction

How can strategies for supply chain management (SCM) be aligned with business strategy in order to exploit improvement potentials in a systematic way? SCM is a successful business concept for the cooperation of enterprises in the area of logistics by connecting, aligning and coordinating processes in supply chains as well as flows of material and information. Using SCM, enterprises pursue opportunities for better customer service, improved efficiency and cost reduction. On the operational level of SCM, a wide set of concepts and best practices exists as for example vendor managed inventory and continuous replenishment. However, on a strategic level dealing with business objectives, the subject of supply chain strategies has received little attention [Ross, 2000]. Furthermore, the interest of the top management in SCM on a strategic level is increasing due to its impact on the success of enterprises [ELA/Bearingpoint, 2002], [Nienhaus et al., 2003]. Consequently, there is a need to close the gap between the strategic level dealt by top management and the application of operational SCM concepts: the use of SCM concepts and therefore supply chain strategies should be aligned with the corporate and business strategies in order to ensure the achievement of toplevel business objectives. The goal of this paper is to provide a comprehensive concept for the development of supply chain strategies, which are aligned with corporate and business objectives. In the following, after a short look on SCM, strategies and issues, a decomposition of supply chain design is discussed. It forms the basis for a concept for the development and implementation of supply chain strategies.

Motivation: Supply Chain Management, Strategy and Issues

In literature, there are many definitions of SCM with different focus; e.g. [Schnsleben, 2003]: Supply Chain Management is the coordination of strategic and long-term cooperation among co-makers in the total logistics network for the development and production of products, both in production and procurement and in product and process innovation.

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Generally, in management a strategy guides managers of an enterprise in deciding how to set up and use resources and establishes priorities. Concerning SCM, the terms strategy and strategic are defined and used inconsistently in literature, see e.g. [Seuring, 2003], for instance, e.g., strategic SCM, SCM strategy, supply chain strategy in the following, supply chain strategy will be used. Following a common perception of strategy, especially as endsways-means [Hayes, 1985], supply chain strategy can be described as a balanced set of appropriate measures (means) for the development and exploitation of logistic competitive capabilities and improvement potentials (ways) of supply chain management in order to achieve logistics and supply chain objectives (ends). The objectives usually cover the target areas of costs, flexibility, quality, delivery (lead time), innovation, and, additionally for supply chains, collaboration, coordination and transformability (see [Schnsleben, 2003], [Hieber, 2002]). In a management perspective (according to the generic St. Gallen management model, see [Bleicher, 1994]), SCM can be understood as the design, control and development of supply chains and value added networks: N N N Design: Configuration, definition of collaboration and coordination. Control: Guidance towards the objectives by means of supply chain strategies.

Development: Long-term adaptation to trends through flexibility in collaboration and capabilities. Furthermore, three management levels can be differentiated [Gpfert, 2002]: N N Normative SCM deals with a vision of the supply chain and generic objectives. Strategic SCM comprises supply chain strategies and priorities. The objective is to develop logistic competitive capabilities for competitive advantage and is implemented on the operational level.

Operational SCM means planning, control and execution of processes (operations management) as well as the implementation of appropriate measures. Hence, we can position supply chain strategies as means for the control activities on the strategic level. On the basis of literature reviews and empirical surveys three main trends and corresponding issues concerning SCM on a strategic level can be identified: 1. Strategy focus: Regardless of the importance of strategy in the area of SCM, the topic of supply chain strategy is less present in literature and practice in comparison to operational aspects like, e.g., inventory management, order processing and optimisation [Ross, 2000]. A literature review of strategic SCM concepts shows their emphasis of fundamental decisions and objectives. Especially, the alignment of strategies in the context of SCM with corporate and business strategies is pointed out as crucial (see [Gattorna, 1998], [Chopra, Meindl, 2001], [Evans, Danks, 1998]). Consequently, a supply chain strategy should support the corporate and business strategies (at the corporate level and level of business units, respectively) and enable to achieve corporate and business objectives (strategic fit). [ELA/Bearingpoint, 2002] verified this issue also in practice. Value based focus: Value based management (VBM) aims to align all management activities to the improvement of the value of a company and is widely accepted and used (e.g., shareholder value, economic value added etc.). The adoption of VBM for logistics and especially SCM is in an early stage, while logistics and SCM are identified as important value drivers (see [Lambert, Burduroglu, 2000], [Christopher, Ryals, 1999], [Evans, Danks, 1998]). A value based SCM deals with the pivotal questions How to derive means and ways from objectives in order to create value? and

2.

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How do measures contribute to the value creation?. Investigations on SCM as a value driver do not go into the details of how objectives and means are related. Therefore, the understanding of the effects of SCM and the systematic relation of operational measures and objectives is impeded. For example, customer satisfaction influences sales and can be influenced by SCM. Thus, the question of interest is How customer satisfaction can be influenced by SCM? One possible answer may be By a high delivery quality, on which availability of materials, capacities and information have impact. Cause-and-effects relationships or driver trees can model such relations. This way, means (i.e., drivers) on an operational level (e.g., availability) can be connected with objectives on a strategic level (i.e., outcomes, e.g., sales, customer satisfaction). 3. Performance focus: The importance of supply chain performance is already high and increasing [Nienhaus et al., 2003]. Many concepts in the area of performance management exist: Supply chain controlling and monitoring, benchmarking and performance measurement. Performance indicators are widely used for the measurement. Balanced scorecards as a widely used tool for strategy communication, implementation and performance management [Kaplan, Norton, 1996] are being adapted for SCM specific requirements (see, e.g., [Brewer, Speh, 2001]). For a successful performance management, a balance of financial and non-financial performance indicators is essential as well as a causal model as a basis laying out the cause-and-effect relationships between drivers and outcomes [Ittner, Larcker, 2003].

As a conclusion from these interrelating issues, a value based focus can ensure the alignment of supply chain strategy with corporate and business strategy, while performance management measuring the success can be connected. In the following, the question will be examined, whether the axiomatic design methodology (to be introduced in the next section) can be used for the development of aligned supply chain strategies.

Methodology: Supply Chain Design Decomposition (SCDD)

Axiomatic design was developed at the Massachusetts Institute of Technology (MIT Boston) as a scientific approach for the generation and selection of good design solution for products, processes, and systems [Suh, 2001]. Axiomatic design focuses on the identification of functional requirements (what to achieve) and the selection of means for achieving them (how to achieve). Objectives are expressed as functional requirements (FRs) for a solution and the possible means as design parameters (DPs) (cf. [Engelhardt, Nordlund, 2000]). The design process can be characterized as the selection of the best set of means to satisfy the objectives (furthermore, the methodology includes axioms as generic principles for good design solutions). By decomposing the design into several levels of objectives-meanscombinations, a causal model of the design is created showing the connections of an objective and the corresponding solution. This is done in iteration, i.e., high-level objectives and means are decomposed into lower level objectives and means, until a level of sufficient detail is reached. This systematic approach has two main benefits (see [Duda, 2000]): N N The separation of objectives and solutions helps to clarify the logic and to focus on what to be achieved prior to thinking about solutions.

The systematic decomposition enables to concretise high-level goals systematically on lower levels. Axiomatic design has been successfully applied to the design of many products, systems, and software [Suh, 2001] as well as to development of manufacturing systems [Cochran et al., 2001].

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In ProdChain, an international research project, axiomatic design was applied to supply chain management in order to develop a toolbox for the measurement and improvement of logistics performance in supply chains. The result of the application of axiomatic design to SCM is the Supply Chain Design Decomposition (SCDD). During the elaboration of SCDD, all FRs and DPs and their relations were identified and validated mainly by literature reviews and research. SCDD as a whole was validated by several applications during the project. The highest level of SCDD concerns strategic supply chain management and is set up according to the methodology of economic value added (EVA) as an appropriate representative of the success of the enterprise with the scope to SCM. EVA can be understood as net operating profit after taxes minus a capital charge, which depends on the total invested capital and the capital costs (see [Ehrbar, 1998]). The idea behind is, that a business is not successful unless it earns more than the costs of capital. EVA is a widely used concept of value based management (VBM). It can be transformed into other VBM concepts, e.g. economic profit, as well.
FR-1 High Economic Value Added (EVA)

DP-1 Optimize Value Drivers

FR-11 High Sales Revenue

FR-12 High Asset Efficiency

FR-13 Low Operational Logistics Expenses

DP-11 Increase Customer Satisfaction

DP-12 Reduce NonValue Adding Assets

DP-13 Create Efficient Structures and Operations

...
FR-111 High Delivery Quality FR-112 High Delivery Reliability FR-113 Short Lead Times FR-114 High Delivery Flexibility

...
FR: functional requirement (i.e., objective) DP: design parameter (i.e., means) Arrows: cross influence

DP-111 Reduce Variation from Quality Targets

DP-112 Reduce TimeVariation of Fulfilment Cycle

DP-113 Speed Up Fulfilment Cycle

DP-114 Establish Scalable and Adaptable Resources

...

...

...

...

Figure 1: Excerpt from the Supply Chain Design Decomposition (SCDD)

In SCDD, starting with the main objective to increase the EVA, the optimisation of the value drivers of SCM is chosen as mean. In the next step, the value drivers revenue, operating cost reduction and asset efficiency are identified. Going further, e.g., revenue is decomposed via the means of increasing customer satisfaction this yields value drivers high delivery quality, high delivery reliability, short lead times and high delivery flexibility. Finally, this procedure results in a huge tree with more than 200 elements covering the target areas of delivery quality, delivery reliability, flexibility, costs, and assets. At the bottom level, SCM concepts and best practices are assigned (e.g., vendor managed inventory), which were identified and classified. Figure 1 shows a small excerpt of the SCDD tree. The sequence of functional requirements and design parameters from left to right is not arbitrary it reflects the logical sequence of decisions and implementation of measures [Cochran et al., 2001] meaning, for instance, that first a certain quality has to be established

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prior to optimise reliability and reducing lead times and so on. The level of quality depends on the strategy. Compromising quality would lead to serious problems while optimising the other means. This is in accordance with empirical findings and the sand cone model of [Ferdows, De Meyer, 1999].

Development and Implementation of Supply Chain Strategies

The methodology of axiomatic design can be used for the development of supply chain strategies because it systematically connects objectives and means. As discussed above, a supply chain strategy consists of SCM objectives with appropriate means associated to them, concretised systematically, and priorities. The tree can be passed top-down concretising objectives and means step by step so they get more and more operational. In doing so, we search for the essential driver for an objective, which leads to a corresponding mean. For example, DP-11 increase customer satisfaction can be identified as a mean for FR-11 high sales revenue, cf. Figure 1. The next step is to derive relevant sub-objectives for this mean (e.g., FR-111 high delivery quality). These sub-objectives can be prioritised as well. This procedure is repeated unless a level of detail is reached that allows the implementation of the respective measures. Usually this is the level of common SCM concepts and best practices. The result of this procedure is a stepwise-concretised supply chain strategy consisting of prioritised objectives and a balanced set of appropriate measures. Often, a mean influences the achievement of many objectives, thus conflicts of objectives may arise. In SCDD, cross influences are visualised as dotted arrows (cf. Figure 1). When selecting means and prioritising objectives, we have to take into account conflicts of objectives and positive as well as negative side effects. Furthermore, available resources and capabilities have to be considered. This logic can be framed into a process of supply chain strategy formulation and implementation using the common phases of a decision making process (based on [Simon, 1977]): 1. Intelligence: Problems or opportunities can be identified for instance by means of benchmarking or performance measurement. Furthermore, by browsing through the SCDD tree and analysing gaps between the actual state and good SCM, areas for improvements can be identified. Design: Possible alternative supply chain strategies can be formulated as concretised objectives and means on several levels using the SCDD as described above. Input for priorities comes from product and marketing strategies as well as from corporate strategy. Choice: Alternative strategies can be compared and selected using the criteria achievement of objectives, accordance with priorities and minimum conflicts of objectives etc. Furthermore, the feasibility has to be ensured in terms of capabilities and resources as well as by analysing the prerequisites, risks etc. Therefore, objectives and means have to scrutinised closely, and, if required, the strategy has to be modified going back one step. Implementation/Review: The implementation sequence of the measures is as aforementioned from left to right, while the priorities for resource allocation and efforts are set. During the implementation and review, possible conflicts of objectives and side effects have to be monitored carefully. The assessment of the success of measures and their contribution to high-level objectives can be supported by performance management tools (e.g., performance indicators can by assigned to each objective or FR, respectively) for continuous improvement and learning.

2.

3.

4.

The development of a supply chain strategy, using the axiomatic design of SCDD and the decision making process as described above, is a primary top-down approach. Nevertheless,

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during all phases, feedback should be included by assessing the contribution of measures to high-level objectives bottom-up in order to ensure feasibility of the measures as well as the alignment with top-level objectives. Moreover, logistic competitive capabilities can be developed and exploited by defining areas of operational excellence and setting priorities where operational excellence is to be fostered in order to gain competitive advantages based on SCM. This way, a comprehensive and coherent supply chain strategy can be identified, which N N is systematically derived from strategic business objectives and thus coherent with corporate and business strategies (strategic fit); distinguishes different levels of abstraction from the strategic level down to the operational level and thus respective activities can be assigned to the different management levels of an enterprise from top management down to a supply chain manager; ensures that all measures are aligned and contribute to the value creation (in the sense of value based management) without confusing means and ends; shows the cause-and-effect relationships (i.e., cross influences and side effects) and value drivers for a profound understanding of business and logistics logic.

N N

The issues discussed in section 2 are being taken care of the following way: strategy focus by ensuring the strategic fit, value based focus by aligning all measures with value creation (e.g., economic value added EVA), performance focus in the intelligence phase as well as in implementation and review phase by assigning performance indicators for measurement and monitoring.

Example

This section presents an example order to illustrate the application of the procedure described above. Dell Computer is a well-known, successful computer manufacturer, which has established as one of the leading enterprises of its branch (see, e.g. [Park, Burrows 2003]). Excellence in SCM played a decisive role in the success story. Dells strategy focuses primarily on low costs and secondarily on a high growth of sales revenue as drivers for business success, i.e. for example economic value added, cf. Figure 2. Following the aforementioned implementation sequence, we take first a closer look to FR-11 high sales revenue. This objective can be supported by SCM trough an increased customer satisfaction (DP-11) that can be concretised by means of a high delivery quality (FR-111), a high delivery reliability (FR-112), short lead times (FR-113) and high delivery flexibility (FR114). Dells priorities are short lead times and high flexibility of processes and resources. These objectives are further concretised until best practices can be identified like e-procurement, consignment inventory and supply chain event management etc. here, strong logistic competitive capabilities can be developed (e.g., efficient and fast SCM processes). Analogous, the objective FR-13 low operational logistics expenses can be decomposed into subobjectives and thus made operational (not shown in Figure 2). Considering side effects, for instance DP-11 has a strong influence on FR-13 (depicted by an arrow). Therefore, especially an appropriate level of quality has to be established first, since FR-111 is an important mean for DP-11: The level of quality as perceived by the customer should neither be too high (too costly) nor too low (putting customer satisfaction at risk). For that reason, the implementation sequence of measures is from left to right as mentioned above. For the implementation, the efforts and allocation resources follows the priorities. Concluding, prioritised paths in the SCDD consisting of a balanced set of concretised objectives and appropriate measures represent the supply chain strategy.

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Example

FR-1 High Economic Value Added (EVA)

DP-1 Optimize Value Drivers

FR-11 V High Sales Revenue

FR-12 High Asset Efficiency

FR-13 U Low Operational Logistics Expenses

DP-11 Increase Customer Satisfaction

Implementation Sequence

DP-12 Reduce NonValue Adding Assets

DP-13 Create Efficient Structures and Operations

...
FR-111 High Delivery Quality FR-112 High Delivery Reliability FR-113 FR-114 U V Short Lead Times High Delivery Flexibility

...

DP-111 Reduce Variation from Quality Targets

DP-112 Reduce TimeVariation of Fulfilment Cycle

DP-113 Speed Up Fulfilment Cycle

DP-114 Establish Scalable Implementation and Adaptable Sequence Resources

FR: functional requirement (i.e., objective) DP: design parameter (i.e., means) Arrows: cross influence

...

...
Best Practices

...
e-Procurement, Consignment Inventory

...
Supply Chain Event Management

Figure 2: Example for the Development and Implementation of a Supply Chain Strategy

Conclusion and Outlook

The methodology of axiomatic design framed into a decision making process can be used for the development and implementation of coherent and comprehensive supply chain strategies due to the hierarchical differentiation of objectives and means. A supply chain strategy consists of prioritised objectives and a balanced set of appropriate measures. Thus, objectives and measures are concretised and made operational in a systematic way. Furthermore, they are all aligned with top-level objectives and corporate and business strategy. Cross influences and side effects as well as available resources and capabilities have to be taken into account. Preliminary experiences during the ProdChain project show, that the application of this approach is quite intuitive and leads to meaningful results but requires some effort. Further research will focus on the elaboration of the structured process and on the integration into management concepts (e.g., balanced scorecard, integrative management) as well as strategic SCM concepts. Additional case studies are being carried out in order to gain more experiences and feedback from industrial application for improving the methodology.
Acknowledgement ProdChain (www.prodchain.net) is an international research project with ten industrial and four academic partners funded by the European Commission in the IST programme (IST-2000-61205) and IMS (IMS-99006). The authors wish to acknowledge the European Commission, the Swiss Federal Office for Education and Science, Prof. Dr. Paul Schnsleben and all partners of ProdChain for their support.

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References

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